It is time to deliver to retain bullish undertone in rupee and stock market
Rupee has now recovered more than 100% of its decline from pre-June 2012 mid quarter monetary policy review high of 54.92 to recent low of 57.32 and more than 30% from pre-Budget FY13 high of 48.60. During this time, NIFTY has recovered most of its post-Budget fall from 5630 to 4770. It is all about “sentiments” and “expectations”. The sentiment has shifted from “negative” to “positive” post Dr. Singh taking charge of the Finance Ministry, with build-up of very high expectations. The critical issues on the agenda are unwinding of contentious tax related issues in the Budget (including removal of withholding tax), significant hike in fuel prices to release pressure on fiscal deficit, removal of policy bottlenecks in attracting FDI flows and early shift into growth supportive monetary policy stance. It is important to deliver these expectations post Presidential elections and enable RBI to deliver next round of CRR and rate cuts in July 2012 monetary policy review. These are very essential to retain current rally in rupee and domestic stock market.
There are three options on the immediate way forward: if the delivery is to expectations, rupee will get into consolidation mode around 54; if delivery is beyond expectations, rupee will extend its bull run into 51-52 and if it is short of expectations leading to yet another disappointment, rupee will be back at 57.00-58.50 to post a new all-time low above 57.32. It is a crisis and make or break kind of situation and it is time to act decisively and deliver to expectations. It is difficult to address issues related to growth and fiscal deficit without bringing resolutions in Current Account Deficit and Balance of Payment position. The external factors have turned favourable with stability in commodity prices and easy availability of external liquidity till 2014-2015. This is the time to pull these flows into India for shift into favourable monetary conditions to spur domestic investments for capacity expansion. It is also important to set the road map for permanent solutions to balance Current Account and usage of fiscal deficit for investments (into core sectors) rather than consumption (cost subsidisation).
What is the expectation? It may be wishful to look for delivery beyond expectations at this stage. The choice is between delivery to expectations or facing yet another disappointment. So, the chance of extended rupee gains into 50-52 is low at this stage. It is either for stability around 54 or decline back to 57.00-58.50. Rupee stability around 54 into the short/medium term (say 3-6 months) is good for the system to retain export competitiveness and to cut non-essential imports. It is also felt that rupee is seen to be at fair valuation around 54. The outlook into the short term therefore is to look for consolidation around 54 (short term range at 53-55). There will be demand for forward dollars on extended rupee gains into 53 to cover up to 3M payables at forward value below 54 and good supplies on weakness into 55 to sell 12M receivables at forward value above 58. In the meanwhile, the possibility of extended gains in NIFTY into pre-Budget high of 5630 is good but would prefer to stay neutral on extension beyond there. If all goes well on domestic macro fundamentals, and resultant sovereign rating upgrade can bring the focus to November 2010 high of 6338. It is the time for corporate entities to evaluate market risks in their Balance Sheets and stay mostly covered on exchange rate exposure. Over all, it is time to “realise” the “hope” to retain the bullish undertone in the asset markets.
Moses Harding
Head – ALCO and Economic & Market Research
IndusInd Bank, Mumbai
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